When it comes to our long-term investment strategy and retirement planning, my husband and I have a pretty good idea of what we’re wanting to achieve, and we’re actively taking the steps to get there.
We use Personal Capital to track our net worth, portfolio, and investments. I love Personal Capital because they’re completely free! (Can’t beat free, right!)
Obviously, things can always change, but our current plan is pretty solid.
However, when it comes to the best options for short-term savings, things can get a little trickier. There are two sides to every coin, and a perfect example of this is interest rates.
When interest rates are low, mortgage repayments are also low which is great. But on the flip side, when interest rates are low, it means that you’re probably getting a lower rate of return on your short-term investments.
The definition of “short-term savings” can vary depending on your individual situation, but personally, I consider my short-term savings to be money that I will probably need to access within the next 5 years.
Because the money needs to be accessed relatively soon, it’s not a good idea to invest it in the stock market. If there’s a downturn during those 5 years, there’s not really enough time to recover.
With that being said, what are the best options for short-term savings? There are a few different things you can do with money that you need to access within 5 years, and below, I’ve listed the pros and cons of some of the different options for short-term savings.
5 Options for Short Term Savings
1) Checking Account
I use my checking account on a daily basis, but I only keep enough money in there to cover our general living expenses. Any surplus is transferred over to various other accounts.
Pros
- Money is easy to access
- Low risk
- You can have as much or as little money as you want in the account
Cons
- Low interest rate
2) Savings Account
We keep our emergency fund in a savings account through CIT Bank. Some people argue that you should keep your emergency fund in an easily accessible investment account, but I disagree.
I think that an emergency fund should not only be easy to access, it shouldn’t have any risk attached to it. Imagine if you needed to access your emergency fund, and the stock market crashed – your emergency fund is gone.
Related: Sinking Fund Categories
CIT Bank makes it easy to access your money quickly, but because it’s an online account, you don’t have the temptation of being able to swipe your card. And, it pays higher interest than a regular brick and mortar bank!
Pros
- Money is easy to access
- Low risk
- You can have as much or as little money as you want in the account
- Slightly higher interest rate than a checking account
- Less likely to be tempted to spend the money in a savings account, especially if you don’t have a debit card attached to the account
Cons
- You may have to wait a couple of days for your money to clear into your checking account
- There is a limit to the amount of transactions you can make each month
3) Certificate of Deposit
A certificate of deposit is similar to a savings account, with the main differences being that there is usually a minimum investment amount and your money is “locked away” for a set amount of time (you can usually access your money before the maturity date if you need to, but penalties will occur.)
Because of this, the interest rates are usually a bit higher than what you would get with a regular savings account.
Pros
- Low risk
- Slightly higher interest rate
Cons
- A minimum investment is usually required
- Not as easily accessible
- If money is withdrawn before maturity date, penalties will occur
4) Savings Bond
With a savings bond, you’re essentially lending money to the U.S. government to help them pay for their borrowing needs. Because savings bonds are backed by the U.S. government, they’re considered to be a safe investment.
Pros
- Low risk
- Minimum investment is only $25
- Can be cashed in for face value plus interest after 12 months
- Interest earned is usually exempt from state income tax
Cons
- Low rate of return
- Can be confusing
- Although they can be cashed after 12 months, there is a 3-month penalty if cashed before 5 years
5) Money Market Account
A money market account is basically a checking and savings account hybrid. Like a checking account, but unlike a savings account, a money market account gives you access to a checkbook, with a limit of 3-6 checks per month.
Pros
- Low risk
- The ability to write between 3-6 checks a month
Cons
- Limited transactions
- Many banks are starting to offer higher interest on checking and savings accounts than on money market accounts
So what is the best option for short-term savings?
Like most things in life, there isn’t a “one-size fits all” when it comes to the best option for short-term savings, but the good thing is, there are plenty of options. Personally, when it comes to short-term savings, I have a checking account, savings account and a certificate of deposit. I do not have any savings bonds or a money market account.
When considering the best option for your short-term savings, I would start with opening a free Personal Capital account so you can get started tracking your spending, figure out your net worth, and build a customized retirement plan. (You can get your free account by clicking here.)
Remember, the first, and probably most important savings goal you should be working towards is your emergency fund.
This money should be in an account that is easy to access (but not so easy that you might be tempted to spend it.) I recommend Capital One 360 for this (and the bonus $25 will help get you even closer to your savings goal. Here’s the link for Capital One 360.
Once you’ve got that squared away, then you can start considering the options for both short-term, and long-term savings, and choose the one that best fits in with your financial goals.
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